Conditionality

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Will IMF loans hurt the poor this time around?

13 February 2009

While the IMF undertakes high-speed reviews into its lending instruments and conditionality, it continues to make crisis loans with heavy conditionality that may adversely impact the poor in developing countries.

Pakistan’s November loan (see Update 63) came with the requirement to raise interest rates and electricity tariffs before the end of 2008. It also contained as a condition that the World Bank create a plan by the end of March 2009 to strengthen social safety nets. Pakistan newspaper Dawn reported that “The finance ministry released only 70 billion rupees for development projects in July-December against an expected 200 billion rupees.” It further noted, that “the government had been left with no option but to cut development expenditure and take other measures to meet the budget deficit target of 4.2 per cent by the end of June, as agreed with the IMF.”

The IMF seems to have back-tracked on one of its strict conditions in the case of Hungary (see Update 63). After an interest rate hike, currency devaluation and massive IMF loan last year, the country faced a further 22 per cent devaluation of its currency in January. However, the government has apparently agreed, with IMF knowledge, to compensate public sector workers who are losing their annual bonuses. When IMF managing director Strauss-Kahn visited Budapest in January he said that further structural reforms would be necessary.

economic liberalisation as a priority

Most of the IMF loan agreements so far have, like the Pakistan arrangement, included clauses about strengthening social safety nets and maintaining or increasing spending on social protection. This is an improvement from the way the IMF approached social protection in the Asian financial crisis in the late 1990s. But as recessions in the borrowing countries deepen, meeting strict spending limits in IMF programmes may be difficult without cuts to public services and social protection.

New loans out the door

Latvia secured an IMF stand-by arrangement worth more than $2.3 billion just before Christmas. Conditionality in the programme includes an immediate 15 per cent reduction in local government employees’ wages, a wage bill ceiling that mandates a 30 per cent cut in nominal spending on wages from 2008 to 2009, a cut in government spending equivalent to 4.5 per cent of GDP, a pension freeze and a value-added tax increase.

These IMF conditions look like standard structural adjustment packages except for the IMF’s agreement not to require a devaluation of the Latvian currency, which is fixed against the euro. Devaluation was opposed specifically by the European Central Bank and Latvia’s Baltic neighbours. Like most of its crisis lending, the conditions and reduced government spending are opposite to the counter-cyclical economic policies that rich countries are pursuing to counter the global recession.

After its $2.5 billion IMF loan was approved in mid-January, Belarus saw a 25 per cent devaluation of its currency. While its loan documents have not yet been made public, the IMF press release indicates: “Fiscal tightening measures are aimed directly at slowing investment and consumption. Wage growth will slow… and public investment will be restrained.” It adds that “the programme places economic liberalisation as a priority.”

Two other countries have signed “precautionary” deals with the IMF: Serbia and El Salvador. The Serbian programme requires the IMF to approve any public sector pay increases or changes to pensions, and has been criticised by former World Bank chief economist Joseph Stiglitz: "The record is that, in general, countries that have entered into IMF stand-by arrangements of the kind that Serbia has agreed to have not gotten much benefit," said the 2001 Nobel Prize winner.

The documents describing the conditions on El Salvador’s small programme, worth $800 million, were not yet public at the time of writing, but an IMF press release on the El Salvador programme indicated that the government had committed to not increase its fiscal deficit as a percentage of GDP. Tajikistan has publicly announced that it is seeking a new IMF programme worth about $60 million. Its last programme was terminated in early 2008 over misreporting of the government’s finances to the IMF (see Update 60).

Rumours have been swirling about more countries. Turkey is currently the biggest borrower from the Fund, with more than $8 billion in loans outstanding, but does not have a current IMF programme. It has been negotiating a successor programme with IMF staff for nearly a year. They have failed to agree on a fiscal deficit target both for the medium-term and in 2009.

Other European countries have also steadfastly denied rumours that they will approach the Fund soon, including Lithuania, Romania and Celtic tiger Ireland. Whereas usually the IMF proclaims that it stands ready to help its members, in the case of Ireland the IMF has specifically said it does not envision coming to the IMF for a loan. Even the UK opposition parties have been taunting the British government over the potential for an IMF programme if the situation gets bad enough. Sri Lanka’s central bank governor issued a steadfast rejection of an approach to the Fund in January, despite the conventional wisdom saying that it must go to the Fund soon.

ESF changes and new borrowers

While the loans have been flying out of the Fund to middle-income countries because of the financial crisis, low-income countries are now starting to feel the effect of the crisis. The Poverty Reduction and Growth Facility (PRGF) augmentations of 2008 (see Update 61) have given way to requests for support under the Exogenous Shocks Facility (ESF). The ESF, a short-term concessional window to help low-income countries cope with external economic events, was revised in September 2008 (see Update 62). The reduced conditionality burden under the revisions was enough to convince poor countries to sign up to ESFs for the first time.

In late 2008 Malawi agreed a $77 million dollar ESF loan, Senegal agreed a $75 million loan, the Comoros islands arranged for $3 million, and the Kyrgyz Republic for $100 million. In January Ethiopia borrowed $50 million. The Ethiopia and Comoros loans were of small values that will be disbursed under the so-called “rapid-access component” of the ESF, meaning little conditionality. But Malawi, Senegal and Kyrgyz opted for fuller programmes of 12 or 18 months. The Malawi programme includes conditions limiting government borrowing.

Conditionality not up for public discussion

Despite a controversial report on structural conditionality released by the IMF’s Independent Evaluation Office in early 2008 (see Update 59), the financial crisis programmes show that traditional conditionality requiring strict fiscal adjustment is still being used. The IMF managing director Dominique Strauss-Kahn ordered a review of all lending instruments and conditionality in October 2008, just after the financial crisis broke . The reviews have been rushed and relatively closed.

The IMF has indicated that the conditionality review will be prepared and discussed at the board around the end of February. It will only cover conditionality attached to IMF loans used by middle-income countries. Compared to the last conditionality review, conducted between 2001 and 2003, this review has been secretive, with no public consultation period, no open meetings and no discussion with external stakeholders.

IMF staff are also preparing two papers on the IMF’s lending instruments – one on middle-income countries and one on low-income countries. On the latter, the Fund made available an issues paper for perusal by civil society organisations that were interested and hosted a conference call for NGOs to ask questions of the IMF staff member in charge of the review. However, the paper assumed, despite consistent objections from NGOs (see Update60, 59, 56), that the IMF should have a strong medium-term lending role in low-income countries.

The IMF hosted two short “consultations” at the end of 2008 which involved only a web page, phone number and email address to which comments could be sent. There was little interest by NGOs. However, Oxfam International responded to the reviews by calling on the IMF “to revise the existing conditionality guidelines” to stop demands for privatisation, trade liberalisation, and ceilings on public sector wage bills.

It remains to be seen how these internal IMF papers and reviews will match up with the G20 working group that is handling IMF reform (see page 1). If the decisions about conditionality and lending instruments are taken in capitals, it would provide more fuel to proposals (see Update 61) to radically reform the composition and purpose of the IMF board.

Financial crisis riots spread

The economic crisis caused by financial meltdown has translated into public anger in many European countries, most notably in two countries that took IMF loans with tough conditions.

In Iceland, the financial mayhem drew thousands of protestors onto the streets in November, the time of the IMF rescue package. The protesters reappeared in January when the Icelandic parliament reconvened, with some of the protests turning violent. Eventually the rightwing government fell and a new left of centre coalition has taken over.

Riga, the Latvian capital also saw mass protests in January with violent clashes between the police and protesters. The protests, led by farmers who have been hit by falling incomes, have forced the Latvian agriculture minister to resign.

Global justice activists have taken note of these protests and the big demonstrations in France and Greece. This may herald the return of mass mobilisations against neo-liberal economic policies and the institutions that push them.

The Bretton Woods Project is a UK-based NGO that challenges the World Bank and IMF and promotes alternative approaches. We serve as an information provider, watchdog, networker and advocate. Our flagship publications are the Bretton Woods Observer, a quarterly critical review of developments at the World Bank and IMF, and the Bretton Woods Bulletin, an online update of news and action on the institutions.